Hold the Line on Price

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Rosalind Resnick
Entrepreneur.com
Monday, March 9, 2009; 12:00 AM

This article has been excerpted fromBeating Bailout Blues: How to Stay Sane When the Markets Are Driving You Crazy, by Rosalind Resnick, available on Amazon.

When business gets slow, it makes sense to cut your prices to boost demand for your company's products and services, right?

Think about it: If you've got a store and customers aren't coming in, what's the first thing you do? You hold a sale. Once you slash your prices by 25 percent or give shoppers who buy one pair of jeans the chance to buy another pair for 50 percent off, your merchandise will start flying off the shelves.

Wrong. Unless you're absolutely sure that charging less will boost your sales (which it rarely does), resist the temptation to do it. If you're selling a high-value product or service that your customers can't easily source from another vendor, slashing prices will only slash your profits. And if you cut your prices too often, you'll educate your customers to simply wait for the sales and never pay full retail. (That's what happened to the department store business, with mixed results.)

The reality is that, while price cuts may work for airlines and automakers (though they don't seem to be working so well any more), price cutting is usually not the best strategy for a small business--especially a business that provides specialized products and services to a target market that cares more about value and service than paying the lowest possible price. Not only does discounting generally fail to help you acquire new customers but it may also result in your making less money from the customers you already have.

"If you provide an exceptional product or service, people will buy from you--even in a tough economy," says Laura Allen, co-founder of15secondpitch.com, a website that has helped more than 11,000 people pitch themselves more effectively to customers, employers and referral sources. Rather that cutting prices, "you'd be better off increasing the value that your clients get for their money. It's much easier to add a few useful extras, than it is to get by on even smaller margins."

While slapping a price tag on your product or service seems like a one-minute job, it's actually a lot harder than it looks. Set your prices too high, and you lose sales. Set them too low, and you lose money.Over the years at Axxess Business Consulting, we've worked with many clients to help them analyze their pricing models and figure out how to maximize their profits without sacrificing revenue. As a result, one client--a quick-serve restaurant--was able to raise prices on some of its high-end juices by as much as 20 percent to 30 percent. Another--an outsourced relocation specialist--was able to re-price its hourly services as affordable, fixed-price packages geared toward corporations and high-net-worth individuals.

What's the secret to great pricing? While setting prices has always been more art than science, most businesses typically employ one of three strategies:

Cost-plusYou buy filet mignon from the wholesaler for $10 and sell it at your restaurant for $30.Market-basedThe restaurant down the block starts charging $29.95 for a surf-and-dinner, so you decide to do the same.Value-basedFirst, you whip up a fancy, new tasting menu and charge $100 for a seven-course meal that costs you only $20 in ingredients (much higher than the standard restaurant markup). Then you pair each course with a selection of wines and you make even more money.

If you have any doubt which pricing strategy makes the most sense for your business (or any business, for that matter), just go to Starbucks and try to order a $2 cup of coffee.

"While it's tempting to cut prices, be very careful of any permanent changes to your pricing," says Sanjyot Dunung, CEO of Atma Global Inc., a New York City-based software company. "The hard calculation is if a price discount will lead to more volume and overall sales. You have to also note if more volume equals more profitability. Many people assume incorrectly that more sales means more profitability, but not always. In lean times as well as good times, you will serve your business best if your focus stays on profitability as well as gross sales."

Dunung's solution: "When working with customers or resellers, we have found that it is more useful to always note the SRP (suggested retail price) and then offer a temporary discount based on a customer or reseller. This strategy is harder for retail sales but works very well for our wholesale product side of our business. It's very important to stress that the discount is temporary so that your customer is aware that it is a unique opportunity. If you choose this approach, make sure not to repeat it too frequently or keep it in place indefinitely as the customers become used to the discount and base their buying decisions on the timings of the discounts. The risk, then, is that the discount becomes your de facto price."


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